Career Corner: Welcome aboard...please don't go!

Taking the fear out of Non-Compete Agreements

By: Donna Carroll
VP, Business Development & Recruitment - Systems Personnel

Straight from the trenches, on behalf of my recruiting profession, I have great news to report...the employment market is improving!  That’s right folks, we are seeing many more job opportunities available lately.  As is customary during the climb out of an economic decline (I try to avoid use of the ‘R word’), the first signs of improvement often come in the form of consulting engagements.  When organizations have had to tighten their belts and put most initiatives on hold for so long, it creates a pent-up demand for projects to be completed.  That’s what we’re experiencing right now.  Certain projects have reached ‘critical status’ and organizations need consulting resources to assist them with these projects.  This translates into employment opportunities with consulting firms as well as software vendors with a professionals services division.

Working for a consulting firm or software vendor can be a very rewarding career.  There are many benefits to this type of lifestyle, namely: a diversity of client sites, challenging and exciting projects, an opportunity to travel, and an attractive income.  One other situation which is quite common with consulting firms and software vendors (which differs from hospital employers) is the presentation of a non-compete agreement along with your employment offer.  It’s very common for one of these organizations to require new employees to sign non-compete agreements.  For someone who has never had to even think about such an agreement, the idea can be a little concerning.  In my 20 years of recruiting, I have seen many non-compete agreements and most of them have been reasonable in nature and do not place unfair restrictions upon employees.  However, I always advise candidates the same way when it comes to reviewing any such agreements: use common sense, seek clarification if you have any questions, and speak with an attorney if you have any concerns about it.

I recently had the opportunity to visit with an attorney specializing in the healthcare information technology (HIT) field and asked him many of the questions which I frequently field from candidates.  Attorney William O’Toole, now in private practice, was MEDITECH’s corporate counsel for 20 years.  In this capacity, Bill has certainly seen his share of contracts.  Although the majority of Bill’s experience has revolved around the details of software agreements, he was kind enough to share his legal knowledge to address some of our questions regarding employment-related agreements.  Below is a summary of our discussion.

MCB:  Some of the employment-related agreements which some employers require new employees to sign include:  non-disclosure agreement, non-solicitation agreement, and/or non-compete agreement.  What are the basic differences between these agreements?

O’TOOLE:  A non-disclosure agreement (NDA) between two parties usually serves to identify certain important information of one party and prevent the second party from disclosing that information to others.  It could also be mutual, meaning each party may disclose certain information to the other, and the receiving party must keep it confidential.  NDAs can be used between companies seeking to do business together, or between individuals and companies or organizations (such as when a consultant is retained).  Non-solicitation agreements in this context usually serve to restrict an ex-employee from contacting and soliciting business from the customers of the former employer.  Non-compete agreements (NCAs) are designed to prevent individuals from leaving a company with valuable information and then using that information in a new job with a competitor of the company to the detriment of that original company/employer.  In essence, the NCA trumps each of the others.  If you can’t go to a competitor, then not being able to solicit customers is not much of a factor, nor is possessing confidential information.

MCB:  In most states non-compete agreements must be "reasonable" in scope and allow the candidate to continue to earn a living without harming the employer.  What do you consider to be a reasonable scope for a non-compete agreement?

O’TOOLE:  This is the essence of the determination that courts must make in cases involving NCAs.  In general terms, in order for an NCA to be “reasonable” it must protect an employer’s legitimate business interests while not unduly restricting the employee’s ability to work elsewhere.  Other key components are length of time and geographical area (historically).  The first part, protecting legitimate business interests, is satisfied if the employee involved had access to trade secrets of the former employer, a legitimate reason for the NCA. As for length of time, six months to two years, depending on the situation, is usually found to be acceptable.  Anything longer than that would require a stiffer business reason for the restriction.  Finally, geographic scope is considered.  A simple example would be a business in a city, where there really are no “outside” competitors for the specific service or product.  In that case, a limitation on that geographical area is probably acceptable.  It would not prevent the employee from going to the next city and performing essentially the same work.  That said, in the technology world, I believe that geographical area could probably be argued to include the entire US market.  HIT vendors do not stop at city or state lines in seeking customers.  There has been some relaxing of the geographical scope restriction, which is why I used the parenthetical “historically” above.  A good example might be a developer working on Google’s new Chrome browser leaving the company and going to work for that big company in Redmond, Washington.  My expectation is that a court would rule that a US or maybe even worldwide restriction would be acceptable in that case.

MCB:  What should an employee do if their company adopts the new practice of having employees sign a non-compete agreement after this employee has been with the company for some time?

O’TOOLE:  First, a little background.  In this scenario, the NCA is a separate agreement, standing on its own.  All contracts must have “consideration”, or something of value, offered by each party and consequently accepted by the other party in order for the contract to be valid.  If the NCA was a condition of employment at the point of hiring, then the promise of a job fills the consideration requirement.  Introducing the NCA in an existing employer/employee relationship is different.  Some courts have held that continued employment is sufficient consideration. In other cases, the execution of the NCA in conjunction with a raise or promotion has served to establish that sufficient consideration is present to enforce the NCA.  All that said, there are many ways to answer this question.  The employee may not have any reasonable opportunity of negotiation.  Some may however.  If the employee is a valued software scientist, then ideally that individual could seek a severance package, providing an amount of money sufficient to offset the period of time in which they are prevented (by the NCA) from working in the same field for a competitor. As a general answer, the employee should review the NCA carefully, even seek legal advice, in order to determine the restrictions imposed and the reasonableness of those restrictions.

MCB:  If an employee has signed a non-compete agreement with their employer and is "let go" due to a lack of work, or even a consolidation of two companies, can they go to work for a direct industry competitor?

O’TOOLE:  Assuming for the sake of this question that the NCA is valid and reasonable (see above), and would probably be upheld if the employee were the one terminating the relationship, then the issue really comes down to a restriction on the employee’s ability to make a living when the employer terminates employment other than for cause.  Keeping in mind that we started with the assumption of a valid NCA, then strictly speaking, no, the employee is not free to ignore the NCA and the former employer could sue the employee, but then the court would have to look at the fact that the employee did not leave voluntarily and determine the reasonableness of limiting that individual's livelihood.  The short answer is that being “let go” does not nullify the NCA, but enforcement by the former employer will be more difficult than if the employee left on their own.

MCB:  Are the courts becoming more or less favorable toward employer claims on non-compete agreements?

O’TOOLE:  Trends like expanding the geographical area restriction tend to make me think that the courts will side with the employer when there is a sound and justifiable business reason for the NCA.  Also note that the US Congress has recently given authority to the President to appoint what is termed by many to be an “Anti-Piracy Czar” with the express purpose of clamping down on copyright and intellectual property infringement.  At the risk of repeating myself (too often), given a justifiable business reason for the NCA, if it is not overly burdensome on the individual, I believe the courts will lean toward enforcing the NCA. That said, courts have always expressed a keen interest in not limiting an individual’s livelihood, so do not despair that everything is going to the side of corporate America at the expense of the worker.

MCB:  What states are the most "employee friendly" when the courts rule in non-compete issue cases?

O’TOOLE:  California (no surprise) is the most employee friendly, essentially disregarding NCAs except in very limited situations clearly defined by statute.  Virginia is also on the employee's side, but does enforce NCAs fitting certain criteria.  Likewise, New York leans toward the employee but does not abandon the employer like California.

MCB:  What are some circumstances under which a non-compete agreement may be deemed invalid or unenforceable?

O’TOOLE:  If you go back to the components of a reasonable NCA above, one example would be the lack of a justifiable business reason, such as in the case of an employer having all employees sign an NCA, regardless of position, from receptionist to software engineer.  This would work against the employer.  Another example would be an unlimited duration, where the employee can never work for a competitor.  In short, if an NCA is too broad and lacks a sound business reason, its enforceability is strongly suspect.

MCB.  What advice would you give an employer to help ensure their non-compete agreement is enforceable?

O’TOOLE:  Following nicely from the prior question, the employer should make sure it is seeking to protect a legitimate business interest, and NOT just that is does not want competition.  Further, if the employer uses NCAs for only certain employees that have access to confidential material or trade secrets, they strengthen greatly their likelihood of support from the courts.  Limited duration and geographical area are also helpful.  In short, if the employer is careful to make the NCA as tight in scope as possible, in order to make the burden on the employee as little as possible, then they are in much better shape if the NCA is contested.

MCB:  What advice would you give to someone who is ready to seek new career opportunities but has signed a non-compete agreement with their current (or past) employer?

O’TOOLE:  First, take out your copy of the NCA you signed (you did keep a copy, right?) and review it.  What are you prevented from doing?  If you didn’t keep a copy and your employer does not know you are looking elsewhere, that could make things a bit sticky.  If your departure is above board and known to all, there could be room for discussion.  That said, if you are a key player and plan to move to a competitor in a comparable role, don’t expect any cooperation from your soon-to-be former employer.  Which brings up an important issue.  Where a valid NCA exists, the new employer may also be susceptible to legal action by the former employer.  Employers that lose key personnel to competitors sometimes bring action against both the former employee (for violation of the NCA) and the new employer (for tortious interference with the prior relationship evidenced by the NCA).  It is not unheard of for a new employer (that steals the key employee) to belly up and take care of the employees defense, legal bills, and settlements with the former employer.  I am not trying to scare people, but it should be understood that if an NCA is valid and you breach it, you are potentially liable for damages to your former employer.  In addition, the former employer could seek an injunction preventing you from working for the new employer while the case is decided.  Finally, if everything goes the former employer’s way, you could still be prevented from working for the competitor into the future.

Now, following all that, there is a final issue in play here.  Should you tell a prospective employer that you have an NCA in place with your current employer?  If asked directly, then obviously you must reveal the fact.  If not asked and you do not volunteer the information, and the former employer sues the new employer, then the easiest way for the new employer to reduce its exposure is to terminate you.  Not a welcome thought.  Unfortunately I am limited in what I can dispense as free advice (if I want to keep my license), so I cannot provide specific legal answers in this forum.

MCB:  From the perspective of a new employee, are non-compete agreements something to be feared?

O’TOOLE:  No, they should not be feared, but they should be understood.  In my area of law practice, healthcare information technology and all that goes with it, companies invent things and they try to sell more of these things to the industry than their competitors.  They have a right to protect their inventions, know-how, trade secrets and customer bases.  Anyone seeking to join such a company really should understand this going in.  That said, it is not reasonable to expect a person to work for only one company in a given industry for their entire career.  Some do, most do not.  There is also the consideration of the type of work that the employee performs.  The software scientist should have far more expectation of restriction on the ability to switch to a competitor than an implementation consultant.

Final Comments:

NCAs are not bad.  If a company has something worth protecting, something essential to its business that if shared with a competitor would be damaging to its business, then they should be able to protect it.  I don’t know how an employee would consider it “OK” to take that information elsewhere.  I know it happens, but that does not make it right.  Separately, we are all free to work wherever we choose.  Absent the malicious factor, people should not be restricted from working for a competitor.  Heck, lawyers change firms all the time.

The problem is that you cannot unlock the brain of a software scientist, extract all they have learned at your company, then let them go on their way.  Knowledge is retained.  There is nothing we can do about that.  I once saw it referred to in a BIG hardware company’s agreement as “intellectual capital” (and I knew it was time to put that file down for the day).  So even if nothing is physically removed, the secrets go right out the door in the scientist’s gray matter.  Keeping them from using that knowledge to a competitor’s advantage seems fair.  Keeping them from earning a living doing what they like is unfair.  It is a balancing act, a weighing of the consequences to each side, and a determination of fairness that the courts must perform when ruling on NCAs.

And now for the final legal disclaimer.  Certain states may not recognize or enforce NCAs, while others may support them.  If you have serious concerns, please check with an attorney or your the local US Department of Labor office. At least that wasn’t in fine print!

William O'Toole graduated from Noble and Greenough School and holds degrees from the University of Notre Dame (Bachelor of Arts in Economics) and Suffolk University Law School. In the course of his long tenure as Corporate Counsel at Medical Information Technology (MEDITECH) he successfully negotiated tens of thousands of agreements representing revenue in the billions. After two decades at MEDITECH, Bill founded O’Toole Law Group and specializes in healthcare information technology (HIT) services.  His extensive experience dealing with healthcare organizations throughout the United States, Canada, and beyond provides a keen insight to the widely diverse needs and goals of the many types of entities in the healthcare sector and prepares him well to serve as an integral part of healthcare executive teams during their HIT acquisition process.

Bill can be reached at wfo@otoolelawgroup.com or visit O’Toole Law Group online at http://www.otoolelawgroup.com.